Lower your tax bill by making sure that you count all your losses, especially last year when the market suffered a downturn. We’ve teamed up with crypto tax calculator Koinly to present a guide to crypto tax loss harvesting.
Before we jump into tax loss harvesting tips, let’s go over the crypto tax rules real quick.
In many jurisdictions, crypto is generally viewed as a capital asset - like property or stocks. That means when you dispose of a capital asset, you’ll realize a capital gain or loss. Disposals of crypto include:
- Selling crypto for fiat currency like USD, GBP, or AUD.
- Swapping crypto for another cryptocurrency - including stablecoins, tokens, and NFTs.
- Spending crypto on goods or services.
- Gifting crypto - depending on where you live.
If you dispose of your crypto and make a gain, this is a capital gain and you’ll generally pay capital gains tax on it.
If you dispose of your crypto and make a loss, you have a capital loss. You won’t pay tax on losses, and you can use these losses to offset them against your gains!
Track, harvest, and offset losses
There are three steps to recognizing capital losses to reduce your tax bill:
- Track unrealized losses
- Harvest losses
- Offset losses on your tax return
1. Tracking unrealized losses
It is always a good idea to track your crypto portfolio performance for both good and bad.
Using Koinly’s crypto portfolio tracker helps you track your overall performance as well as the performance of your individual assets - so you know where and when to maximize your gains or cut your losses. Because it is also a tax calculator, Koinly helps you track both your realized and unrealized gains and losses.
This way, you can identify which assets to harvest losses on to reduce your tax liability. In the case of tax loss harvesting, use your portfolio tracker to spot unrealized losses before moving onto the next step.
2. Harvesting losses
To offset a capital loss, you have to realize it. This means you have to dispose of your assets by selling, swapping, spending, or sometimes gifting it.
There’s no right answer to the most efficient way to harvest losses. It will depend on where you live and the crypto tax rules in that area.
For example, in the UK, gifting is taxed - unless it’s to your spouse, so you could gift crypto to your spouse in order for them to dispose of the asset if they pay a lower tax rate or haven’t yet used up their personal Capital Gains Tax allowance.
If you want to completely get rid of crypto, selling your crypto for fiat currency may be the most suitable option. If you want to reinvest, trading your crypto for another cryptocurrency might be preferable.
There are other instances where it's difficult to realize your losses from theft, rug pulls, funds frozen in exchanges, and illiquid NFTs.
- Theft: Australia, Canada, and the UK all allow investors to claim a capital loss due to theft provided you have plenty of proof. However, in the US, investors may not claim a capital loss due to theft unless it’s related to a federal disaster.
- Rug pulls: In the event of holding a worthless rug-pulled token, depending on the market conditions, you have the option of selling your tokens on an exchange, swapping them with a native non-custodial wallet, gifting them (excluding in the US), or sending them to a burn address.
- Frozen funds: If your funds have been frozen on an exchange due to liquidity issues or bankruptcy proceedings, it is prudent to wait until the proceedings are over. It is possible for investors to receive some of their funds back in the best-case scenario. It is only if they do not provide a refund that investors can make a claim for a capital loss.
- Illiquid NFTs: If you’ve got an NFT that you can’t sell or trade, refer to projects like Unsellable NFTs to dispose of your asset and realize your loss.
3. Offsetting losses
Generally speaking, there’s no limit to the amount of losses that you can offset against gains - so you can harvest and offset as many losses as you want to reduce your tax bill as much as possible.
Even if you have no gains to offset your losses against this year, almost all tax offices let you carry forward your losses indefinitely. This is until you have offset them against gains. This means realizing your losses during a bear market may hugely benefit you in the future when the market bounces back.
Some countries have added bonuses when it comes to losses. For example, in the US, investors can offset an additional $3,000 in losses against their ordinary income, reducing their tax liability even further.
Koinly put together a detailed guide on US tax loss harvesting tips. It also covers the tax loss harvesting rules for the UK, Canada and Australia. Check it out.
How to calculate and report your taxes on WOO Network
Now that you know how to harvest and offset your losses on your tax return, let’s take a look at how to calculate and report your taxes via WOO X.
WOO X pairs with Koinly automatically, allowing you to import your trades and calculate your gains, losses, and income. From here, Koinly is able to generate your crypto tax report, ready to file with your tax office.
Now that you know how to harvest and offset your losses on your tax return, let’s take a look at how to calculate and report your taxes via the WOO Network. WOO X pairs with Koinly automatically, to import your trades and calculate your gains, losses, and income. From here, Koinly is able to generate your crypto tax report, ready to file with your tax office.
Here’s how to do your WOO taxes with Koinly in 4 simple steps:
- Add data. On your account dashboard, click on ‘Add Data’ to bring up a list of supported wallets and exchanges. Search for ‘WOO X’ by typing in the search box.
- Connect to Koinly. Connection to Koinly can be made via generating an API key on your WOO X account. Or, you can manually upload a CSV file of your WOO X transaction history. Koinly uses AI to comb through your entire crypto transaction history and identify which transactions are taxable and which aren’t. Then it’ll calculate your cost basis, capital gains or losses, and the fair market value of any crypto income on the day you received it.
- Download your crypto tax report. Upgrade to a paid Koinly plan and download the tax report you need, when you need it. Koinly can generate a huge variety of reports for users around the world. These include IRS Form 8949 & Schedule D, HMRC Capital Gains Summary, the ATO myTax report, and many more.
- Use your crypto tax report to file your tax. Hand your report over to your accountant, upload your crypto tax report to your tax app, or file using paper forms.
WOO X users receive an exclusive discount on Koinly plans! Find out more.
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